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European Development Finance Post-2015: Public Meets Private?

Continuing ODI’s financing progress series with a look to post-2015, Florian Krätke looks at the increasing importance of private finance and how European public aid is working alongside it – do private and public sources of finance see development in the same way?

There’s a neat introduction to Europe’s outlook on development financing in a recent comment by European Commissioner for Development Andris Piebalgs: ‘The EU is the biggest donor in the world, and is committed to increasing the effectiveness of its aid. In such times of economic downturn, we need to make the most of the resources and ensure the maximum impact of our aid.’

Indeed, with €51 billion disbursed in 2012 alone, the 27 EU Member States provide more aid than the US, Canada and Japan combined (at €36 billion), and seem set to provide even more. Survey results also show that over 60% of EU citizens believe Europe should keep or add to its commitments to increase aid.

Yet it’s the second assertion from Commissioner Piebalgs – the need to maximise the impact of aid – that stands out as a welcome move away from the bean-counting and repackaging that still occupies much of the aid industry. It seems that the European institutions and donors have realised that volume isn’t everything.

This is clear from the European Commission’s vision of financing for development post-2015, published alongside last year’s report on ODA spending. It notes that different forms of finance for development should be mutually reinforcing, and backed by the right policy environments. The EU now recognises, for example, that private finance is as important as public finance for poverty eradication and sustainable development in low- and middle-income countries (Figure 1).

partnerships with the private sector that span both the financing and implementation of development initiatives, and

policy environments that enable effective partnerships with the private sector, including solid regulatory frameworks, and institutions to manage them.

The EU is, as we can see, a major player in development, but it is not known for its work with the private sector. So how is the EU proposing to get to grips with these two factors?

The EC has just released a policy statement to guide the way in which the EU, and to a certain degree the Member States, engage with the private sector for development in the coming years. Private sector actors are seen as not only as the target for EU actions, but also as partners or delivery channels for development outcomes (Figure 2).

Figure 2. Terms and concepts in EU support to private sector development and engagement

Source: European Commission, 2014. Issue Paper for consultations on the proposed Commission Communication “Strengthening the Role of the Private Sector in Achieving Inclusive and Sustainable Growth in Developing Countries”

Blending can leverage a lot of resources: €1.5 billion grant aid invested in over 300 blending projects since 2007 has attracted roughly €45 billion (or 30 times the amount of aid) in project financing. Evaluations also note improved project design as a result of collaboration with development finance institutions (such as KfW and PROPARCO) and private sector actors. The EU wants to do more of this, and do it better, but three burning questions need to be answered first.

How to manage risk? Blending and other public-private arrangements have to balance the management and mitigation of risk. The predominant risk is often political, which can be mitigated by coordinated public action (e.g. commitment to technologies) or the structure of project financing. Owen Barder, however, argues that it is sometimes more important to increase returns than to minimise risk.

What benefit for development? Sure, large amounts are ‘leveraged’, but who’s to say that the EU could not have spent aid to improve the market or regulatory conditions independently of any private sector investment? And can a project or partnership provide an incentive for additional, developmental private investment or activities that would not have occurred without that incentive (i.e. that is not equal to subsidising the private sector)? Despite a host of experience, there is still little knowledge about the results achieved by public-private partnerships (PPPs) or their developmental impact.

What incentive for the private sector? Blending aims develop the local private sector, and to attract private investment to new, risky markets – enabling further PPPs. Only 10% of blending projects directly target or are financed with the private sector, in part because the EU does not always have the capacity to identify bankable projects. Small and medium enterprises (SMEs), for example, are targeted mainly through financial intermediaries. How can the EU increase this proportion? Also, how can the EU ensure that grant aid does not crowd out private finance?

Beyond blending, Europe remains a major source of foreign direct investment (FDI) stock in developing countries. The EU’s policy statement will also address how it and Member States can ensure that these investments, as well as those from local investors, can maximise their development impact. Background research for the 2014 European Report on Development indicates that donors such as the EU can do more to improve regulatory environments, their transparency and market conditions in developing countries. This is also what private sector actors want.

So, while public and private actors use the same words, they may not speak the same language – very different ideas persist on what is meant by ‘development’ and who should do what in practice. The questions I have asked here are just some of the questions that need to be answered before public-private partnerships become commonplace in European development cooperation post-2015.

This blog represents the views of the author, and may not necessarily represent those of ECDPM.